India Property (Mauritius) Company-II v. ACIT: ITAT Delhi Reaffirms That a Long-Held Investment Cannot Be Branded a “Conduit” Merely for Lack of Local Substance

Delhi Bench of the Income Tax Appellate Tribunal (ITAT) sets aside adverse assessment order denying India-Mauritius DTAA benefits 

In a decision that adds to the growing body of Indian jurisprudence on treaty eligibility for Mauritius-based investment vehicles, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has set aside an assessment order that denied India-Mauritius DTAA benefits to a JP Morgan-linked investment fund on long-term capital gains of over INR 152.6 crore. The Tribunal held that the Assessing Officer (AO) had no material evidence — only suspicion — to brand the assessee a “conduit entity,” and that holding investments for over five years before realizing gains was itself strong evidence against any conduit or treaty-shopping allegation.

This judgment is significant because it deals head-on with a recurring fact pattern in international tax litigation: foreign tax authorities denying treaty benefits to investment funds on the ground that local directors lack “real” decision-making power, local expenditure is minimal, and funds are routed back to investors soon after divestment. The ITAT’s reasoning offers useful guidance on how far the “substance over form” doctrine can be stretched by tax authorities before it tips into unsupported conjecture.

Background and Facts

The Appellant, India Property (Mauritius) Company-II (“IPM-II” or “the Appellant”), is a company incorporated in Mauritius in 2006, engaged in investment activities. It held a valid Tax Residency Certificate (TRC) and a Global Business License-I (GBL-I) issued by Mauritius’s Financial Services Commission

During Financial Year 2017-18 (relevant to AY 2018-1U), the Appellant transferred shares of four Indian companies — ASF Insignia SEZ Pvt. Ltd., Grand Canyon SEZ Pvt. Ltd., Kings Canyon SEZ Pvt. Ltd., and Citadel Homes Pvt. Ltd. — earning long-term capital gains of INR 1,52,C1,71,940. These shares had originally been acquired between FY 2007-08 and FY 2011-12 — i.e., the investments were held for between roughly six and ten years before being divested.

Relying on Section U0(2) of the Income-tax Act, 1U61 and Article 13(4) of the India-Mauritius Tax Treaty (which, prior to the 2016 Protocol amendments, taxed capital gains

on alienation of shares only in the state of residence of the alienator — i.e., Mauritius), the Appellant claimed the gains as exempt from Indian tax and filed its return declaring NIL income, seeking a refund of INR 40,01,520 in taxes deducted at source.

The case was selected for scrutiny. Pursuant to directions issued by the Dispute Resolution Panel (DRP), the AO denied treaty benefits and passed a final assessment order dated 10.02.2023 under Section 143(3) read with Section 144C(13), assessing the entire capital gain as taxable income and raising a demand of INR 25,7C,8C,310 (inclusive of interest under Sections 234A and 234B).

The Revenue’s Case: Why the AO and DRP Denied Treaty Benefits

The DRP’s findings, reproduced in the Tribunal’s order, reveal a fairly elaborate “substance over form” / “principal purpose test” analysis by the AO. The key planks of the Revenue’s case were:

1. Fund-flow pattern: The AO traced the money trail and noted that sale proceeds received on 12.05.2017 were transferred out to “JP MORGAN BU” almost immediately, on 22.05.2017 — within roughly ten days. The original share acquisitions between FY 2007-08 and FY 2010-11 were also routed through other JP Morgan group entities.

   
   

2. No KYC documentation: The assessee did not furnish KYC documents relating to the bank accounts through which the transactions were routed.

   
   

3. No “real” local footprint: The company had no employees, paid no salaries or wages, had no physical assets such as land or buildings, and paid no rent.

   
   

4. Unremunerated and non-resident directors: Of seven directors, none were remunerated during the relevant year, four were non-residents of Mauritius, and two — Jean-Christophe Ehlinger and Colin James Whittington — were executive directors of JP Morgan Asset Management. Board meetings were also attended by teleconference by Ms. Adria Savarese, herself an executive at JP Morgan Asset Management.

   
   

5. Investment manager admission: When asked to identify its investment manager, the assessee initially stated it had not engaged one and that investment decisions were taken directly by its board. However, audited financial statements obtained from Mauritian authorities (via Exchange of Information channels) revealed that JP Morgan Investment Management Inc. (US-based) was the fund’s investment adviser, and JP Morgan India Pvt. Ltd. was the sub-adviser — directly contradicting the assessee’s stated position.

   
   

6. Conclusion drawn: Based on these facts, the AO concluded that the Mauritius-resident directors had no effective say in running the company, and that “effective control and management” actually rested with JP Morgan entities located outside Mauritius — making the Mauritius entity a mere conduit lacking economic substance.

   
   

7. Legal reliance: The Revenue leaned heavily on the Bombay High Court’s decision in Vodafone International Holdings B.V., particularly its observation (para UU) that a TRC and CBDT Circular No. 78U dated 13.04.2000 do not preclude the tax department from looking behind the certificate where, on facts, a Mauritian company has been interposed solely to avoid tax without commercial substance. The DRP also cited Tiger Global International Holdings AB, Mauritius (2018) 402 ITR 311 (AAR) and the Supreme Court’s ruling in GVK Industries (332 ITR 13) on source-based taxation.

On this basis, the DRP rejected the assessee’s objections and upheld the AO’s denial of treaty benefit, prompting the present appeal.

Grounds Raised by the Assessee

The Appellant’s appeal raised five grounds, the most substantive being:

• Ground 1 (Limitation): The final assessment order dated 10.02.2023 was time-barred, having been passed beyond the deadline of 30 September 2021 (as extended by the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020), and was therefore void ab initio.

  
  

• Grounds 2 & 3 (Merits): The AO erred in denying Article 13(4) treaty exemption despite a valid TRC, and in disregarding binding CBDT Circular No. 78U, the Supreme Court’s ruling in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC), and other judicial precedents holding a TRC sufficient for treaty relief.

• Ground 4: Erroneous levy of interest under Sections 234A and 234B.

  
  

• Ground 5: Erroneous initiation of penalty proceedings under Section 270A.

Arguments Advanced by the Assessee

Senior Counsel Sh. Ajay Vohra built a comprehensive rebuttal across several fronts:

1. TRC as sufficient evidence of residency and beneficial ownership. Relying on CBDT Circular 78U, Azadi Bachao Andolan, the Delhi High Court’s ruling in Blackstone Capital Partners (Singapore) VI FDI Three Pte. Ltd. v. ACIT [2023] 146 taxmann.com 56U (Del.), and the Delhi Tribunal’s own decision in MIH India (Mauritius) Ltd. v. ACIT [ITA No. 1023/Del/2022], it was argued that a valid TRC obliges the Revenue to accept the assessee’s residency and beneficial ownership status for treaty purposes.

   
   

2. Genuine fund structure, not a tax-avoidance device. The assessee explained its corporate architecture: it was incorporated in 2006 as an investment fund, wholly owned by India Property Mauritius Company-I (IPM-I), formerly JP Morgan India Property Mauritius Company I. IPM-I, in turn, pooled capital from investors across multiple jurisdictions through a series of feeder funds, channeling that capital into IPM-II by way of equity infusion. IPM-II then made its India investments through proper banking channels, complying with FDI Regulations and FEMA, 1UUU, and held the shares as capital assets in its own legal and beneficial capacity.

   
   

3. Long holding period. The investments giving rise to the disputed gains were held for more than five years before transfer. This, it was argued, was inconsistent with the profile of a “fly-by-night” conduit set up solely to extract a tax benefit on a pre-arranged transaction.

   
   

4. TRC issued under stringent MRA conditions. The Mauritius Revenue Authority’s TRC issuance process involves rigorous conditions, which the assessee had consistently satisfied since incorporation — undermining any suggestion of a sham entity.

   
   

5. Director composition reframed. Counsel clarified that of the assessee’s directors, two were Mauritius-resident and two were non-resident, with three alternate directors. All key commercial and investment decisions, it was submitted, were taken by the Board at meetings held in Mauritius.

   
   

6. Limitation of Benefits (LOB) clause inapplicable. Article 27A’s LOB clause — which prescribes expenditure thresholds for claiming treaty benefits — applies only to capital gains from shares acquired after 1 April 2017. Since these investments were all “grandfathered” (acquired well before that date), the absence of significant local expenditure was legally irrelevant to treaty eligibility.

   
   

7. Outsourced administration is normal, not suspicious. Under Mauritius’s Financial Services Act, 2007, a GBL-I licensee must be administered by a management company holding a GBL-II license. The Appellant had accordingly appointed an external administrator and paid professional fees for those services — a standard, compliant structure for a holding company whose core function is investment decision-making rather than day-to-day operations.

   
   

8. KYC non-availability explained. The relevant bank accounts had been opened roughly 15 years earlier, and the original KYC documentation submitted to the bank was no longer readily retrievable — not evidence of concealment.

   
   

9. Conduit allegation rebutted. The pattern of receiving liquidation proceeds and promptly distributing them as dividends/buybacks was explained as the ordinary operating model of an investment fund returning realized gains to upstream investors — not proof of conduit status. What mattered, counsel argued, was the holding period and commercial rationale, both of which were well established.

   
   

10. JP Morgan personnel attended, did not decide. Board minutes were placed on record to show that JP Morgan-affiliated individuals attended meetings (as investment advisers engaged by IPM-I) but did not make the decisions — those remained with the Board of Directors.

    
    

11. Notes to financial statements misread. The reference to “investment adviser” and “sub-adviser” in the audited financial statements, it was submitted, merely described the fund’s structural arrangements and did not establish that the Board had abdicated its decision-making authority.

    
    

12. On interest under Sections 234A/234B. It was argued that since tax had already been withheld at 0.1% under Section 1U5 (pursuant to a Lower Deduction Certificate), no advance tax was payable, and Section 234B interest — applicable only on shortfall of advance tax — could not arise for a non-resident whose entire tax liability is subject to withholding. Reliance was placed on DIT v. Mitsubishi Corporation [2021] 130 taxmann.com 276 (SC) and Hitachi High Technologies Singapore Pte Ltd. v. DCIT [2020] 113 taxmann.com 327 (Delhi-Trib.).

    
    

13. On limitation. Citing CIT v. Roca Bathroom Products (P.) Ltd. [2022] 140 taxmann.com 304 (Mad.), Super Brands Ltd. (UK) v. ADIT [2023] 147 taxmann.com 323 (Delhi-Trib.), Hindustan Zinc Ltd. v. NaFAC (Jodhpur-Trib.), and the Bombay High Court’s decision in Shelf Drilling Ron Tappmeyer Ltd. v. ACIT (W.P. No. 2340 of 2021), it was argued that the Section 153 limitation period prevails over the Section 144C timeline, and the final order — passed well after the prescribed 12-month window — was void

    
    

The Revenue, in response, simply relied on the findings of the lower tax authorities without adding substantially new arguments before the Tribunal.

The Tribunal’s Reasoning

The Tribunal’s analysis (paragraphs 11 to 13 of the order) is the heart of the decision and proceeds along the following lines:

1. Reading Vodafone BV correctly — and distinguishing it

   
   

The Tribunal closely examined the very paragraph UU of Vodafone International Holdings

B.V. that the AO had relied upon, and found that the Bombay High Court’s caveat applies specifically to companies “interposed as the owner of the shares at the time of disposal of shares to a third party, solely with a view to avoid tax without any commercial substance.” On the facts before it, the Tribunal found this critical temporal element entirely missing

IPM-II had been incorporated in 2006, the investments were made between FY 2007-08 and FY 2011-12, and there was no evidence whatsoever that any investment “flowing from India” had been received to create the Mauritius entity in contemplation of a particular disposal. In other words, Vodafone BV’s test targets last-minute interposition designed around a specific exit transaction — not a fund structure that has held assets for years as part of its ordinary business.

2. Holding period as the decisive fact

   
   

The Tribunal placed substantial weight on the documented fact that investments were held for over five years before transfer, and that the Appellant continued to hold a separate port4folio of investments (in Suadela Constructions, Core Hotels Ventures, Viceroy Bangalore Hotels, and Amrapali Zodiac Developers, valued at roughly USD 10.06 million as of 31 December 2022) even after the disputed divestments. This, the Bench held, was incompatible with the profile of a “fly by night operator” set up purely for tax avoidance, and confirmed that the assessee held the shares beneficially and legally in its own right.

3 . Outsourced administration does not equal lack of substance

On the absence of local employees, rent, and operational expenditure, the Tribunal accepted the assessee’s explanation that, as an investment-holding vehicle whose only real function was decision-making on investments/divestments, it was entirely legitimate — indeed, mandated under Mauritius’s GBL-I regulatory framework — to outsource day-to-day administration to an external GBL-II licensed service provider. The Tribunal held that the Revenue cannot question the genuineness of business operations “without establishing that on a sham basis administrative activities are being shown” — i.e., bare absence of in-house infrastructure is not, by itself, proof of a sham.

4.     No conduit status merely from the timing of fund movements

The Tribunal rejected the AO’s “conduit” characterization based on the rapid transfer of liquidation proceeds to investors via dividends and share buybacks. It reasoned that such a transaction pattern is inherent to the business model of an investment fund — the funds are, by design, meant to be returned to investors along with any gains once an investment cycle concludes. The Tribunal noted that the AO himself had reproduced board resolutions explaining the rationale for divestment and the manner of returning proceeds to investors — undercutting any inference of concealment or artificiality.

5. No evidentiary basis — only suspicion

   
   

In a pointed observation, the Tribunal held that “except for suspicion there was no evidence with the learned AO to rebut the statutory evidence of presumption of genuineness of business activity” flowing from the TRC. This is a significant articulation: a valid TRC creates a presumption of genuineness that the Revenue must rebut with cogent evidence — not merely with an inferential narrative built on the absence of local infrastructure or the international character of advisory relationships.

6.  Policy underpinning — Azadi Bachao Andolan revisited

Echoing the Supreme Court’s reasoning in Azadi Bachao Andolan, the Tribunal observed that since attracting foreign investment into joint ventures and infrastructure projects is itself a stated objective of the Government of India, it is not appropriate to attribute “malice” or a tax-avoidance motive to investment funds like the Appellant simply because they are structured to channel multi-jurisdictional capital through Mauritius.

 7. Outcome

On this reasoning, the Tribunal allowed Grounds 2 and 3 — restoring the Article 13(4) treaty exemption — and held that, since the assessee succeeded on merits, the remaining grounds (including the limitation challenge to the assessment order and the interest/penalty grounds) had become academic and were left open without adjudication. The appeal was allowed, and the assessment order was set aside in its entirety.

Key Takeaways

1. Holding period is a powerful substance indicator. A multi-year holding period before divestment significantly weakens any “conduit”/treaty-shopping allegation, because it is inconsistent with a transaction structured purely around tax avoidance at the point of exit

   
   

2. Vodafone BV is narrower than tax authorities sometimes apply it. The “piercing the TRC veil” principle from Vodafone BV is tied to interposition timed around a specific disposal to a third party — it is not a general license to disregard a TRC whenever a Mauritius entity has limited local infrastructure.

   
   

3. Outsourced administration under GBL-I/GBL-II structures is not, by itself, suspicious. Mauritius’s own regulatory framework expects GBL-I companies to rely on licensed GBL-II administrators; using that structure cannot be treated as evidence of sham control.

   
   

4. The burden remains on the Revenue. A valid TRC shifts a meaningful evidentiary burden onto the tax authorities. Speculative inferences from fund flow timing, non-resident director composition, or international advisory arrangements, without concrete proof of round-tripping or pre-ordained tax avoidance, will not suffice.

   
   

5. LOB clauses under Article 27A are time-bound. Expenditure-threshold requirements under the post-2016-Protocol LOB clause apply only to shares acquired on or after 1 April 2017 — grandfathered investments are unaffected by these expenditure tests.

   
   

6. The decision sits within a consistent line of Delhi ITAT rulings — including MIH India (Mauritius) Ltd. v. ACIT and SAIF II-SE Investments Mauritius Ltd. v. ACIT — that have generally favored Mauritius-resident investment vehicles holding valid TRCs against conduit allegations, absent concrete evidence of abuse.

Conclusion

India Property (Mauritius) Company-II v. ACIT reinforces a now well-established but still frequently litigated principle in Indian international tax law: a Tax Residency Certificate, while not an absolute shield against scrutiny, places a substantive burden on the Revenue to demonstrate — through facts, not inference — that a treaty resident has been “interposed” purely to avoid tax in connection with a specific transaction. Where an investment vehicle has a documented multi-year holding history, makes investments through verifiable banking and regulatory channels, and operates within the licensing framework of its home jurisdiction, the absence of a large local administrative footprint will not, without more, justify denial of treaty benefits.

For practitioners advising Mauritius-structured funds, the case is a useful precedent on three fronts: distinguishing genuine fund structures from artificial step-transactions, correctly cabining the Vodafone BV “look-behind-the-TRC” principle, and reaffirming that LOB-style expenditure scrutiny under Article 27A has no retrospective application to pre-2017 grandfathered investments.

This article is for general informational purposes and does not constitute legal advice. Readers should consult the full text of the Tribunal’s order and qualified tax counsel before relying on this analysis for any specific transaction or dispute.